What is a silent auction?

author-avatar By on August 16, 2021
What is a silent auction?

A silent auction isn’t hosted by a mime - learning what it is could be worth your time.

When you think about auctions, you might picture a boisterous auctioneer, well-dressed and loud, shouting each new bid in that typical 'auctioneer' voice. From people yelling to the gavel slamming down once it’s sold, auctions are usually high-energy, busy, and intense events.

Hearing the phrase 'silent auction' might make you wonder what that could possibly entail. No, it’s not hosting an auction in a library. To make it short, it’s an auction without the auctioneer.

In this article, we’ll discuss:

What is a silent auction?

A silent auction is a less common type of auction that involves bidders submitting their offers privately rather than publicly. There is no auctioneer involved, so the buyers bid directly. This way, potential buyers don’t know each others' offers. Consequently, there’s an added layer of privacy and, ultimately, mystery.

Some real estate experts boast that this secrecy increases the likelihood of buyers submitting their maximum offer first-go, rather than just offering within the range of the people bidding around them. Meaning, the owner is more likely to get a higher price for their home.

Further down the track, once the agent has received all submitted offers on the property, they review them with the seller. At this point, the seller has three real options: they accept one offer and proceed with the sale, they reject all the offers and continue trying to sell, or they reject all the offers and withdraw the property from the market.

How is a silent auction different from a traditional auction?

In a typical auction situation, the auctioneer runs the show, and registered bidders correspond directly with them or their bidding agent to submit their offers. It’s often a big spectacle, and the event is usually held on-site. Online auctions are on the rise, however, due to COVID-19 and the on-and-off restrictions that come into play.

A silent auction, on the other hand, is sometimes held over two days. It usually kicks off after the first offer is received, which alerts other interested parties to make their competing bid. Rather than an auctioneer steering the bidding war, the sales agent corresponds directly with individual bidders, and negotiates with each buyer privately.

It’s all about the reserve price

The biggest difference between silent auctions and traditional auctions is the reserve pricing strategy, according to real estate consultant, Chris Bellesini. Before we dive into this, let’s discuss what a reserve is, and how it’s different from the asking price for a normal sale.

To put it simply, the reserve is the minimum sale price the seller is willing to accept. The reserve needs to be set in writing prior to the auction, though sellers can choose to proceed without a reserve. However, according to the Queensland Government, most sellers choose to set a reserve price.

The auctioneer is allowed to disclose to bidders whether there is a reserve price set, however, they are not able to disclose what it is. They can only mention when the property is ‘on the market’ - meaning, when it’s hit reserve.

An asking price, on the other hand, is usually advised by the agent based on what the property is actually worth, based on a professional valuation. Both are what the seller ultimately wants, however what they actually get could be a different story - be it on auction day, or if the house is sold via private treaty. 

While traditional auctions usually have a reserve, silent auctions don’t have a typical reserve price.

"The focus of the silent auction is not what the vendor's reserve is and what they will accept, but rather, knowing that the interested buyers will exceed this figure. Therefore, it is about the agent having them submit their very best offer to secure the property," Mr Bellesini said.

However, the usual course for an auction is that if there is no reserve, the seller must accept the highest offer. 

Auction vs private treaty: Significant differences

Before the deep dive into everything silent-auction related, let’s clear up all the significant differences between auctions and normal property sales.

So that you can clearly visualise all of the differences, we’ve first put all of the key differences into a table. Then, we’ll get into discussing each point of difference.

Auction

Sale

Typically requires a 5-10% deposit

No set minimum deposit required

Waives cooling off period

Cooling off period remains

Typically 30 day settlement, but can differ

No required settlement period

Unconditional

Conditional or unconditional

Deposit

Properties that sell at auction usually require a 5-10% deposit to secure the property. This can be negotiated, but must be done so prior to auction. For example, a dollar amount can be acceptable - it just must be agreed upon by the seller, before the auction goes ahead. Normal sales, on the other hand, don’t have a set deposit amount needed to secure the property. Sometimes, buyers will provide a smaller initial deposit, and pay a larger sum with the balance deposit.

Cooling off period

Auction contracts waive the cooling off period, meaning that once the contract is signed, there is no period in which the buyer can back out. Sales contracts on the other hand have a cooling off period that's typically 3-5 days. In Queensland for example, it ends 5pm on the fifth business day from the date the buyer receives the executed contract. This essentially means buyers can change their minds about purchasing a sale property, but not an auction property.

However, if a buyer breaches their cooling off period, they forfeit a percentage of their deposit. In Queensland, for example, it's 0.25% of the purchase price.

Settlement

Auction contracts typically come with a standard 30 day settlement date, though this can sometimes be negotiated. If settlement terms are different from the seller's wishes, this needs to be negotiated prior to the auction. On the other hand, normal sale contracts don't have a standard settlement date, so it can settle when the buyer chooses. Whether this is within 30 days, 60 days, 90 days, or in conjunction with another property - the choice is up to the buyer.

Finance

The last notable difference between auction contracts and sale contracts is how they are financed. In addition to a 5-10% deposit, homes sold at auction are immediately unconditional. Meaning, it can’t be subject to finance, building and pest, or any other special condition that could impede its unconditional date. Normal sales, however, can be conditional, meaning they can be subject to finance, building and pest, subject to sale, or any other applicable special condition.

Hearing from the experts: All things silent auction

Now that all the logistical stuff is out of the way, let’s hear from some experts about the benefits of silent auctions and, ultimately, whether they trump regular auctions.

Mario Lattanzi, Principal of Clarke Real Estate, is an advocate for silent auctions. He prefers a silent auction as a traditional auction needs at least two registered bidders to be successful.

Since bidders aren’t disclosed openly at a silent auction, this will not affect its success. Plus, he says the concept of not knowing who is bidding against you and how much they’re offering ends up working in the sellers' favour.

"The intent of the seller is that an auction will generate the competition between buyers and push the price up," Mr Lattanzi said.

"The transparency of the public auction process dictates that bidding will be comparative, that is, bidders will only bid one increment more than what they have to, to in order to secure the property. Therefore the property is not being sold to the highest price the buyer is willing to pay."

When discussing benefits of going silent, he said withholding the offers you’ve already received works best. This is a key difference between silent and traditional auctions, as discussed earlier, because normally bidders know what they’re up against and can bid accordingly.

He calls the silent auction a "true competitive environment" for buyers to put their "best foot forward". According to Mr Lattanzi, silent auctions encourage bidders to put in the highest offer they’re realistically ready to pay for the property.

Mr Lattanzi also expressed that sellers have a better chance at selling after a silent auction, rather than after a public auction where all prices were disclosed, and that it gives them a good idea of how much people are willing to pay.

Which type of auction yields a better result?

Mr Bellesini said that as a former agent and a private consultant, he's able to provide experiences from both sides of the fence.

"I had a hot property that we went down the silent auction path with, where the gap between the highest offer and second highest offer was $25,000," Mr Bellesini told Savings.com.au.

"In an auction situation the end buyer would have only have had to bid $1,000 above the competition to secure the property, so in this case the vendor loses a potential $24,000 under a traditional auction method."

He also shared an experience where he saved his clients money at a traditional auction, because he knew he was the highest bidder and didn’t need to raise his offer.

"In a silent auction, not knowing my competition, I would have paid the maximum amount as I would hate to reduce my offer only to miss out," Mr Bellesini said.

Do sellers prefer silent or regular auctions?

"I prefer the silent auction method, as my role is to assist my clients to get the highest price for their homes. The market has been so good for so long that many agents don’t understand that silent auctions will win every time, if the agent follows a process and is a skilled communicator," Mr Bellesini told Savings.com.au.

He argued that many agents to continue to go to auction because it’s good for business. He said that because one in twenty properties are sold each year, five to ten potential sellers attend public auctions to gauge how much their own property is worth.

"An auction is a live advertisement to attract those people," Mr Bellesini said.

When discussing clearance rates at auction, he argued that because silent auctions can often be more flexible than selling at a traditional auction, this can lead to a higher clearance rate.

"As a silent auction can have a flexible starting date, the agent can be confident the offers will be above the reserve price," he said.

"Yes. A silent auction has a focus on getting each potential buyer to put forward their best offer. The downfall of this system is that if buyers have trust issues with the agent, they may be hesitant and frustrated with the system," Mr Bellesini said.

"That is why the selection of the agent and their team is very important. You want them to deal with buyers in an open and honest manner, so when it comes times to make an offer, the process is far smoother."

Why do vendors choose to sell by silent auction?

Marcus Feasey, Buyers Agent at Purple Avenue, said sellers choose the way of silent auction when they’re motivated to sell, and the agent knows there are seriously interest parties ready to bid. on the property

"It’s a good way to enable those interested parties to show their hand, without allowing them the visibility of the current bids on the table," Mr Feasey told Savings.com.au.

"In the current market where it is common for buyers to feel a level of frustration and pressure from missing out on properties previously, the silent auction process can drive them to offer their maximum bid more quickly than they would in a public auction setting."

What buyers need to be aware of when buying at a silent auction

From Mr Feasey’s perspective, silent auctions mean thorough market analysis and due diligence are required, so that he can get a realistic understanding of the property’s price and market value.

"We would recommend that any buyer heading into a silent auction should do their due diligence and research so that they can bid with confidence, and without any major decisions needing to be made under the heat of the process," he said.

"If you are a buyer engaging in a silent auction for a property that you know is right for you, it is important to know what you are prepared to pay for that property and hold firm. You also need a level of trust in what the selling agent is relaying about where your offer sits, and you also need to know at what price you are willing to walk away."

A final note

When it comes time for you to buy or sell a property, you might be faced with a silent auction. If you’re a seller, you might feel more confident about the outcome of a silent auction. If you're a buyer, you might know how to make the right offer with some research under your belt. But whether you’re a buyer or a seller, knowing what a silent auction is and how to benefit from one could end up being a workable home buying strategy.


Image by CHUTTERSNAP on Unsplash

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Rachel is a Finance Journalist, and joined Savings in 2021. Coming from a background in the FinTech space, her interests include the innovation of lending technology, property, investing, and more. With a passion for educating and informing people about their finances, she hopes to increase the financial literacy of everyday Australians.

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